By Michael O’Connor
The COVID-19 pandemic has sent shock waves throughout Wall Street and Main Street. Though the uncertainty that the virus has caused is scary, I want to provide you with some universal financial advice for navigating these perilous times.
First and foremost, don’t panic. Important financial decisions should not be driven by fear or emotions. Whether you’ve invested in the stock market or are living paycheck to paycheck, your top priority should be to stay calm and rational.
There are several basic strategies you can use if you find that you’re struggling to pay the bills. The first step is to make a list of all your monthly expenses, such as rent, payment obligations, commuting expenses, leisure activities and grocery bills. Performing this simple exercise (even if you think you “know” how much you’re spending on what) will be more eye-opening than you think, and help you understand how you’re spending your hard-earned money. Then you can start making adjustments. Food and rent are a priority, but is cable TV or that gym membership? With unemployment beginning to skyrocket, make certain to communicate with any creditors that you’re struggling to pay. That’s right–pick up the phone and call, and don’t be shy. Direct communication (be pleasant but firm) is key. Oftentimes, especially now with recent government intervention, you’ll be able to obtain temporary relief in the form of reduced minimum payments or forbearance.
The current concerns for individuals on firmer financial ground revolve less around near-term obligations and more around their investment exposure. Over the past several weeks, even the most passive investor couldn’t avoid noticing the historic financial market meltdown and subsequent daily volatility. The ferocity of wealth destruction was epic, shedding trillions of dollars in US markets alone, leaving many wondering what to do in response. For investors, the million-dollar question right now is, do I buy or sell? Basic investment advice always begins with assessing risk versus opportunity. First, you need to determine your risk tolerance, or more simply, what you are prepared to lose if you’re wrong. That answer is often related to your age and anticipated time horizon for realizing any reward. For instance, younger people typically have longer time horizons for the assumed risk to pay off. Older people usually don’t have the luxury of waiting the same period of time and tend to be more risk averse as they age in order to preserve capital.
In general, my view is that current economic uncertainty will persist—and we’ll likely see even more adverse effects to the market than anticipated. Since I’m older, I’m growing more cautious and looking to preserve existing capital, essentially seeking to reduce risk. For younger folks with some disposable income to risk, I’d still advise caution. But, if you’re younger, you might look to invest using a technique referred to as “dollar cost averaging.” Trying to pick a market bottom can quickly become a fool’s errand. When I become more optimistic about the economy and market recovering, I’ll probably consider investing in a specific sector Exchange Traded Fund (ETF) to reduce my risk of picking the wrong company. Always remember the golden rule of any good investing approach is diversification.
Wherever you are on the personal financial spectrum, make no mistake that what happens in the market affects your life whether you’re invested or not. Everything from the prices you pay as a consumer to the interest rates you pay on your debt are derived from the financial markets.
In order to expertly navigate your particular financial landscape, start by evaluating your current circumstances and take a disciplined approach to making adjustments.